Key Takeaways

1. Need for a rate cut, at least 25 bp
2. Surplus liquidity in the system should be maintained.
3. Capital expenditure of government should be maintained.
4. Private sector capex yet to set-in
5. Corporate sector not recording significant growth in last 10 years.
6. Lowering interest rates can narrow margin of commercial banks.
7. Oil prices are range-bound.
8. India is receiving large inflows which may not be impacted by rate cut

Recommendations of EGROW Shadow MPC

Members of EGROW — 6
Repo Rate
Pause – 0
Decrease – 6

• 25bps – 4
• 50bps – 2

Guests — 4
Repo Rate
Pause – 0
Decrease – 4

• 25bps – 4

Detailed Views by Members of the EGROW Shadow MPC

1. Dr. Ashima Goyal, Former Member, Monetary Policy Committee, Reserve Bank of India

CPI headline is below target, while growth shows a sharp revival in Q4FY25 to 7.4%. But growth is largely led by a sharp rise in public investment compensating for the election year slowdown and rise in net exports possibly due to exports in anticipation of tariff increase; consumption growth at 6% is good but is 2% below that in Q3. The revival does establish, however, that the drivers of the slowdown were cyclical not structural. Growth still needs the support of countercyclical policy, given a domestic slowdown and global uncertainties. Monetary policy has the space for this, while fiscal support comes from better quality of expenditure

Headline inflation is driven by commodity price volatility, but core inflation (leaving out gold prices that have risen) has been around 3.5% for more than a year now. Global deflation pressures as well as anchoring of domestic inflation expectations are likely to keep it around this.

I had suggested a 50bps cut last time. Although the cut was only 25bps creation of large surplus durable liquidity meant the effective cut was 50bps since short market rates fell.

So my suggestion this time's for a 25bps cut. This will take the repo rate to 5.75% and since liquidity is likely to continue in surplus the effective rate will be 5.5%. So the real effective repo rate will be around 1.5, closer to unity with respect to the target of 4%. Although headline inflation is lower than the target at present, it is better to look through transient slumps as well as spikes. It should be communicated that there is still space to cut depending on the evolution of headline inflation and growth. In uncertain times especially policy must be data-based.

We need to recognize that both the level and fluctuations of inflation are credibly coming down, so the equilibrating change in nominal repo rates will also be lower. It is necessary not to over-react in either direction since that leads to persistent deviations in real rates. Avoiding over-reaction is also true for liquidity creation. Durable liquidity should remain in surplus but not excessively so.

The concerns expressed about banks should moderate given the convergence of deposit and credit growth around 10%, despite banks cutting deposit rates. Falling NIMs are transient and banks continue to make exceptional profits because of good credit quality and growth, in addition to surplus liquidity and treasury profits.

The second concern about lowering interest differentials with the Fed and US treasury yields should also moderate since our markets continue to receive large inflows. The rise in US treasury yields now reflects a rising risk premium because of rising US debt and macro-volatility and is not provoking a flight of capital to the US as is the usual case.

2. Shri Abheek Barua, Former Chief Economist, HDFC Bank & Independent Economist

While stronger than expected GDP print for Q4 might appear to make a case for a reassessment of the rate path, the RBI should continue with its counter cyclical stance and cut the rate by 25 bps and commit to its strategy of liquidity infusion. Tepid credit growth seems inconsistent with headline GDP growth and the impact of persistent external shocks are likely to be felt in this fiscal year and calls for sustained counter cyclical stabilization. Given benign inflation I would call for a 50bps cut. On the market structure front, a shift to the TREPs rate as target seems sensible and will allow for better transmission.

2. Shri Indranil Sen Gupta, Professor of Practice of Economics, Shiv Nadar University

We expect a 25bp cut in the RBI repo rate, with an indication that the further room to cut to support growth will depend on the global rate cycle.

Inflation was never an issue, in our view.

With M3 growth at a paltry 9.5%, liquidity remains the core problem. It is difficult for banks to cut down lending rates to support loan demand and growth.

We continue to worry about the INR should the USD claw back. After all, RBI’s FX reserves, at US$600bn (adj for forwards) is well below the US$650bn we deem optimal. Adjusted for USD, INR is depreciating almost 5% annualized in the past 3 years vs the long run average of 2.5%.

In our view, it is absolutely imperative to recoup FX reserves rather than allow INR appreciation to build a defence against any future USD strength.

3. Ms. Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank

My expectations and recommendations are for a 25bp of rate cut in the upcoming policy. Any need for a front loaded heavier cut is not needed at this juncture. However, over the course of the year, we see room for a deeper rate cut cycle, with terminal rates settling around 5-5.25% given the benign inflation outlook and growth risks tilted to the downside amid global uncertainties.

Furthermore, for now adequate liquidity easing measures have been already taken so we recommend a pause on any incremental easing measures.

4. Shri Siddhartha Sanyal, Chief Economist & Head- Research, Bandhan Bank

There is room for further monetary easing; a 25 basis point rate cut is expected in the upcoming review.

No change in the policy stance is anticipated at this stage; the accommodative stance is likely to be retained.

India’s macroeconomic fundamentals currently appear favourable, providing headroom for continued policy support.

Projected inflation figures over the coming months are benign, reinforcing the case for further monetary accommodation.

Food inflation remains an area to monitor, but current indicators suggest that price pressures are contained.

The external sector position has improved compared to the previous year, reducing vulnerability and strengthening overall macro stability.

There are no significant impediments presently that would prevent the RBI from continuing to support growth and maintain adequate liquidity.

Over the past 3–6 months, markets had priced in a rate-cutting cycle and anticipated additional liquidity injections from the RBI.

The RBI has responded proactively by delivering rate cuts, shifting the policy stance, and exceeding market expectations in terms of liquidity provisioning.

Ideally, such accommodative actions should translate into higher credit growth and stronger transmission. However, credit growth remains subdued.

Industrial credit continues to be sluggish, while retail credit, which had previously been the growth driver, is now witnessing increased prudence from banks.

As a result, low double-digit credit growth is expected to persist, even in a supportive policy environment.

There is a need to ensure that monetary transmission remains moderate and consistent across all borrower segments.

A significant share of banking system loans are now linked to EBLR, ensuring faster transmission. However, the MSME segment remains heterogeneous, with some loans still tied to MCLR where transmission is slower.

Ensuring broad and timely pass-through of monetary policy remains essential, especially for credit-sensitive sectors like MSMEs.

The slowdown in credit growth is acknowledged and is expected to take time to reverse. From a policymaking perspective, sustained support and clear guidance are essential to instil confidence within the financial system and among industrial stakeholders.

Given the strength and stability of India’s banking system, effective monetary policy transmission through bank credit is critical to achieving broader economic objectives.

The current level of liquidity surplus is comfortable, but ongoing system withdrawals necessitate continued liquidity infusions to maintain or exceed the current levels.

In May, higher inflows (e.g., from the RBI dividend transfer) helped support liquidity conditions; a steady-state surplus of 1–1.5% of NDTL is viewed as adequate.

Real interest rates will play a role in investment revival, but the key driver for MSME capacity expansion lies in restoring overall business confidence.

Many MSMEs are linked to export cycles, which remain volatile due to global uncertainties. Stability in external conditions and a clearly communicated monetary framework are essential to support this segment.

6. Dr. Charan Singh, CEO and Director, EGROW Foundation

The GDP data has been released on May 30, 2025. The growth rate recorded at 6.5 percent GDP for 2024-25 is far below the potential growth rate of India. If India has to become Viksit Bharat by 2046-47, per capita income level of USD 17000 has to achieved from USD 2880 in 2025. This would require growth rate of nearly .5 percent in per capita income per annum for the next 22 years as compared with 5.5 percent recorded in 2024-25. Therefore, there has to be a strategic shift in policymaking so that per capita income can grow more rapidly than the current low rate. This will only happen if GDP records a higher growth rate of around 8.5 to 9 percent, our potential, over the next few years. This is not an impossible task as Korea against all odds recorded a growth rate of 8 percent between 1962-89 and China grew by 10 percent between 1980-2010. The global challenges were many during those years too but these two countries maintained a steady path.

The April 2025 Monetary Policy of the Reserve Bank of India has projected a growth rate of 6.5 percent for 2025-26 with quarterly projections at 6.5 percent (Q1), 6.7 (Q2), 6.6 (Q3), and 6.3 (Q4) precent, respectively. The CPI for 2025-26 is projected at 4 percent with quarterly estimates at 3.6 (Q1), 3.9 (Q2), 3.8 (Q3) and 4.4 (Q4), respectively. Thus, the inflation trajectory is benign for the next 1 year but the GDP growth rate too inadequate for Viksit Bharat @ 2047.

In 2024-25, growth rates of real GVA in the secondary sector and tertiary sector are significantly lower that the previous year. The trend of declining growth rate in GVA is witnessed from high of 9.9 percent in Q1 of 2023-24. The growth rates in real GVA are lower than the previous year in manufacturing; electricity, gas, water supply; financial real state and professional services while in agriculture; mining; and construction the growth rates are higher. In aggregate, for the year, the growth rate for manufacturing sharply declined from 12.3 percent in 2023-24 to 4.5 percent in 2024-25 while the slowdown in electricity, gas, and other services; construction; and financial real estate and professional services is also sharp. The performance of major indicators like production of coal, crude oil and cement; consumption of steel; purchase of private and commercial vehicles; cargo handled at major sea ports and passengers handled at airports are recording a decline. The index of industrial production (IIP) for 2024-25 records a sharp decline for mining; manufacture of wearing apparel, wood, rubber, metal and plastic products; manufacture of machinery, computers, motor vehicles, trailers; primary goods; capital goods; intermediate goods; infrastructure / construction goods; and consumer non-durables.

The banking industry has recorded historic high profits in 2024-25 due to increased lending income, gains from treasury operations and reduced provision for NPAs. There is a slowdown in deposits and credit outflow over the last few quarters. In the deposits, there is significant shift towards time deposits and this trend is uniform in different parts of the country.

The robust fiscal performance is continuing and the enhanced government expenditure on capital infrastructure is providing support to the economy. The gross fixed capital formation for 2024-25 is 33.7 percent, higher than 33.5 percent in the previous year, mainly because of government support and not because of the private sector. The Government’s final consumption expenditure at 9.1 percent in 2024-25 compared to 9.5 percent in the previous year clearly reflects long term vision of the government.

The headline CPI for April 2025 at 3.16 percent and food CPI at 1.78 percent reflects that inflation is under control and lower than the inflation target. Similarly, WPI has been much lower for last many months. Thus, even within the restricted inflation target, there is some space available.

The prices of crude oil continues to be benign and expected to range between USD 63 to 65 per barrel over the next year. India’s foreign exchange reserves at USD 691 billion, equivalent to 11 months of import cover should provide adequate support to the economy though some fluctuations due to global uncertainty may impact gold prices.

The Repo Rate has been reduced in the UK and Brazil while held back by US Fed. The expected inflation in these countries are range-bound between 2 to 4 precent in the US and UK and 5 to 6 percent in Brazil. Thus, the expected corrections in the interest rates can be anticipated in these countries over the next few months.

Recommendations for MPC:

It is recommended that if India has to seriously pursue the Viksit Bharat objective of 2047 then the interest rate would have to play a significant role along with fiscal policy. In the past 1 year, private sector investment has not responded significantly despite various initiatives by the Government and the RBI. It is obvious that if the interest rates are artificially higher than the anticipated trend, then the investment by private sector will not occur. In India, the purchase of houses, construction materials, passenger vehicles, commercial vehicles like trucks and buses are always on loans. If the interest rates are high, purchases of these will be deferred. Therefore, it is necessary to reduce the interest rates significantly by 50 basis point to send the message clearly to the industry.

The Government may also like to revisit the target of 4 +/- 2 percent inflation because the 30-year average inflation in India is 6 percent and by fixing a target of 4 percent, inadvertently, policy maker may be hurting growth and employment. The demographic dividend is available only for next 2 decades and if not properly used now, it could lead to long term stunting and wasting of growth in India. A sacrifice for many future generations.

Guest Panellists – Specialists from Market and Members from ASSOCHAM:

1. Shri Subhas C. Aggarwal, Chairman and Managing Director, SMC Group.

The RBI has implemented two successive repo rate cuts of 25 bps each in February and April 2025, totaling a 50 bps reduction year-to-date.

The current repo rate stands at 6.00%, down from 6.50% at the beginning of the calendar year.

Headline CPI inflation has remained consistently below the 4% threshold over the last three months: February 2025 at 3.77%, March at 3.34%, and April at 3.18%.

The favorable monsoon outlook and well-contained food price volatility have contributed significantly to the disinflationary trend.

The RBI had projected FY25–26 inflation at 4%, but the prevailing data suggests a possible downward revision in the upcoming policy review.

In the April 2025 meeting, the RBI projected real GDP growth at 6.5% for FY25–26.

Q4 FY2024–25 GDP print was stronger than expected at 7.4%, supported by stable macro conditions and healthy consumption demand.

Given low inflation and favorable monsoon, the RBI may consider revising its growth forecast upwards in the next policy meeting.

The monetary policy stance was changed from neutral to accommodative in April 2025. This accommodative stance is likely to continue in the June 2025 policy review.

Market expectations indicate two more 25 bps rate cuts this year, one imminently and another later in FY26.

The RBI has managed liquidity well, maintaining systemic adequacy without triggering inflationary risks.

Monetary transmission has been effective; banks have passed on rate cuts, reducing borrowing costs. These benefits will also see improvements in other sectors such as real estate, steel, cement and other ancillary sectors.

GST collections reached an all-time high in April 2025, and May collections exceeded ₹2 lakh crore, indicating robust fiscal performance and underlying economic strength.

Considering the overall macroeconomic environment, a 25 bps repo rate cut in the upcoming monetary policy meeting appears justified and consistent with growth-oriented policy management.

2. Rajan Pental, Co-Chairman, ASSOCHAM National Council for Banking and ED, YES Bank Ltd.

Private sector capex is yet to materially commence. Current indicators suggest that a broad-based pickup in private capex is unlikely in the near term.

The muted capex cycle is reflected in subdued corporate credit growth. Corporates continue to rely on internal accruals and alternative market-based funding rather than bank borrowings.

Going forward, offtake from corporates will be modest, and bank credit to the corporate segment is expected to remain restrained.

In contrast, MSME credit continues to expand at a healthy pace, with year-on-year growth ranging between 18% and 20%, varying by institution.

The quality of MSME credit portfolios is generally robust; however, lending is predominantly concentrated in ticket sizes below ₹1 crore, thereby reaching only a limited share of the MSME universe.

On the retail credit front:

• Consumption-driven retail credit remains relatively stable.
• Commercial vehicle and two-wheeler financing have shown signs of a mild slowdown, indicating caution in discretionary spending.

In the housing sector:

• The residential segment has experienced a slowdown over the past two months following a period of elevated price growth.
• Commercial real estate, however, is expected to see renewed interest and improved activity.

In unsecured lending:

• Banks have adopted a cautious stance with increased risk assessment.
• Growth in this segment has stabilized and is proceeding along a controlled trajectory.

On the liabilities side:

• Over the past one to two years, banks have enhanced customer financial efficiency by offering better cash management and digital services.
• This shift has led to a moderation in the growth of current account balances across corporates, MSMEs, and individual segments.

There has been a noticeable transition from low-cost CASA deposits to term deposits.

In a declining interest rate environment, customers prefer locking in funds in longer-term deposits to secure higher yields.

Indian banks have posted strong profitability figures; however, these gains have occurred in an environment of subdued corporate credit and significantly reduced NPAs.

The broader domestic consumption story is not yet aligning with expectations and remains a critical area of concern.

A key policy consideration is whether demand should be stimulated by reducing interest rates or by enhancing income levels. Given the projected 7–8% salary increments, real disposable income increases may be limited.

In this context, interest rate reductions could play a more decisive role in reviving consumption demand by improving household cash flows.

One possible policy approach would be to remain silent for the current review and implement a cumulative 50 bps cut closer to the festive season. Alternatively, a gradual cycle of three 25 bps cuts could be pursued.

Considering prevailing global uncertainties—including trade tariffs and geopolitical tensions—a bold move of a 50 bps rate cut at this juncture, followed by one or two additional cuts later, may generate stronger momentum and clarity.

The Indian banking system remains fundamentally strong, especially after recent balance sheet clean-ups and regulatory corrections.

Banks typically operate with low CQI for corporate loans and a higher risk appetite in retail lending, necessitating a careful balancing of credit portfolios.

Corporate capex currently stands at around 75% capacity utilization. Many firms are delaying investments, awaiting clearer signals from domestic consumption and global economic conditions.

The government’s CGTMSE has been pivotal in enhancing MSME lending. However, most lending is still capped at ₹1 crore, reaching only about 15% of the MSME base.

There is substantial untapped potential in deeper MSME lending if banks can target the broader segment, which may require scaling outreach to 25–35% of MSMEs, especially as these firms automate to stay globally competitive.

Interest rate reductions should also be viewed in the context of rationalizing deposit costs, particularly during times of liquidity tightening when deposit growth has been inadequate.

A reduction in repo rates results in lower variable lending rates, compressing banks’ net interest margins—hence the need to manage monetary easing with an eye on bank profitability and financial stability.

3. Sh. Arjun G Nagarajan, Chief Economist, Sundaram Mutual

Almost certain the RBI would cut rates by 25bps in the upcoming monetary policy. Positives that support this view:

The strong upward surprise to growth is largely from the fiscal capex spend surprise. So this should not be a worry for RBI on its rate cut trajectory, given FY26 growth is likely to hover only around 6%.

One positive take away from the Mar'25 Capex spending number is that this 3% increase in the budgeted FY25 number pulls down capex growth to 7% from 11%. So if nominal doesn't fall by too much and revenue collections hold up, it would be reasonable to expect an upside surprise for the Centre's capex spending for FY26.

Have been concerned about rupee for a while now. However this time around I feel that isn't something to discuss given how soft the dollar has been and the near term might see some positives around flows.

More importantly, the excess liquidity is expected to touch 4tr + in a few months, up from the current 2.9tr number. This can give the RBI a lot of room to address its forward book or also give a good ground to mask any need to prop up its rupee in the spot market if at all.

Finally on rates, the excess liquidity has taken the weighted call rate to 20bps below the 6% Repo to 5.8%. So maybe a 25bps cut followed by an extended pause is what i'd probably expect.

One concern I have is how the Japanese long-end of the yield curve has been trending up. While this is linked to a myriad set of events around pension fund selling, norinchukin bank losses, US and german long end sell off, rising inflation and more Japanese fiscal concerns.

If the selloff gets broadbased, we could see a repeat of aug'24 with another round of the carry unwind. So a cut and an extended pause is where I see the RBI, where we stand today.

4. Shri Sujit Kumar, Chief Economist, NABFID

Global trade uncertainties continue to weigh on growth prospects. With on-again off-again tariff situations under the Trump administration, there's constant need to remain vigilant on terms of trade and contribution to domestic growth and inflation. All central banks, with exception of the USA and Japan, have eased policy rates anticipating weakening of growth ahead.

In India, real GDP growth of 7.4% for Q4FY25 came as relief amidst geopolitical uncertainties with Government spending in H2 compensating for slack in H1FY25. Net exports also supported growth as exporters availed a window of opportunity to ship goods before higher US tariffs kicked in.

Inflation reading meanwhile has consistently come softer, with food item inflation now joining ranks with core inflation. Monsoon forecast for this year is favourable for low inflation. Encouragingly, easing global growth is likely to keep commodities prices low.

On twin deficits, India stands better placed than many of its peers, creating space for policy support in case of downside surprises on growth, going forward. We are among few nations to have debt-to-GDP on a decline path.

On banking, credit growth remains subpar even as deposit mobilisation has turned comfortable. We need to see reduced cost of capital translate into higher credit growth, specially for industry, which has seen continuous slide in share in bank credit for the last decade. Easier liquidity is enabling but there is need to take macroprudential measures to ease constraints on credit to industry to support India's higher growth aspirations.

Coming to MPC decision on June 6th, softer inflation and comfortable twin deficits offer policy space for the MPC to continue on the accommodative path by easing policy repo rates further, 25 bps now and 75 bps cumulatively in the year ahead to take terminal rates 5.25% in current cycle.